However, as Vanguard points out, investors must also weigh the potential positives and negatives within the economy. “The labor market is realigning to a new normal, and the impact from tariffs will build into 2026, presenting downside risks,” stated Sara Devereux, global head of Vanguard’s fixed income group, during the firm’s quarterly update on Thursday. She added, “However, positive growth drivers are on the horizon, which should create a supportive economic environment for markets over the coming quarters.”
Vanguard estimates that approximately one-third of the new tariff impact has already been absorbed by consumers, with expectations that around half will be reflected by the end of the year. The remaining effects are anticipated to manifest throughout the next year, according to Devereux.
‘Cautiously optimistic’
Colleen Cunniffe, Vanguard’s head of global taxable credit research, shared her perspective on the current fixed income market, noting that while valuations are high, corporate fundamentals remain robust. “Those are backward-looking, but we don’t see any real signs in the consumer or in the labor market that would suggest that would change anytime soon,” she remarked. This leads her to adopt a “cautiously optimistic” stance on the fixed income market, emphasizing the importance of security selection across the credit-quality spectrum.
Pockets of opportunity
Within the realm of investment-grade corporate bonds, Cunniffe identifies opportunities in companies with strong, predictable cash flows. She advocates for a closer examination of the capital structure, particularly bonds with lower repayment priority. For instance, utilities present cap-structure opportunities that offer higher returns within the same corporate framework. “With that kind of approach, the portfolio can create some defense if we’re surprised or wrong on that ‘cautious optimism,'” Cunniffe explained.
Moreover, Vanguard finds banks appealing in the investment-grade sector, bolstered by strong asset quality and anticipated regulatory relief. Cunniffe noted that earnings have been robust thus far. However, she approaches high-yield bonds with caution, selectively identifying opportunities as they arise. Despite the market’s high valuations, it currently exhibits better quality than in previous years.
As mergers and acquisitions gain momentum, Cunniffe points out that deals spun off from investment-grade companies can present attractive opportunities. “Those tend to be appealing because you’re usually acquiring a business unit that is no longer strategic for the larger company, but that doesn’t imply any underlying issues,” she explained.
In addition, Vanguard has been increasing its exposure to structured products, including asset-backed securities and collateralized loan obligations, as a means to enhance income. Emerging markets also offer intriguing prospects, particularly in the mid-quality segment. Cunniffe advises caution regarding lower-quality oil-exporter countries, citing Vanguard’s recent engagement with new debt issuance from Mexico as a prime example.
